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Food war hurts Metcash profit

Greg Roberts

Grocery wholesaler Metcash has downgraded earnings guidance as the ongoing supermarket food war forced down prices, resulting in a weaker first half profit.

Net profit for the six months to October 31 was $82 million, down 13.1 per cent from $94.4 million for the same period last year.

"The deflationary trading conditions are expected to continue and we are now expecting to maintain the higher marketing spend into the second half of the year," chief executive Andrew Reitzer said in a statement.

"Due to the combined impact of these factors (delation and store closures) the company revised our full year underlying earnings per share (EPS) guidance to -2 per cent to -6 per cent."

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That compares to previous guidance of minus 1 to minus 3 per cent, with EPS a guide to shareholder returns.

Metcash said earnings were hurt also by the long-delayed Federal Court approval of last year's $215 million acquisition of discount supermarket chain Franklins.

The number of Franklins stores that had to be closed was more than expected as the viability of marginal stores deteriorated during the delay.

Metcash said 27 stores would be closed or were likely to be closed, 58 stores sold and handed over or expected to be sold, and five were under review.

Profit in the company's biggest earner, the food and grocery business, fell - with earnings before interest, tax and amortisation down 5.4 per cent to $175 million.

The fierce competition between Coles and Woolworths (Safeway's owners) led to price deflation, hurting the independent retailers such as IGA, which Metcash supplies.

During the half, prices for fresh produce fell 13 per cent and packaged groceries by 0.7 per cent.

The food and grocery business lost 0.2 per cent of market share, which Mr Reitzer described as an encouraging result in the challenging conditions.

The company says it has doubled its marketing spend to deal with the price war.

City Index chief market analyst Peter Esho said the once-dominant IGA distribution business, which generated the vast majority of Metcash's business, was now struggling to cope with the price war between Woolworths and Coles.

Margins had slid to 3.8 per cent from 4.08 per cent and sales had hardly grown even when adding new stores, he said.

City Index has Metcash as a Sell, saying gearing by debt to equity was too high at 44 per cent and warning it would have to cut its dividend in order to sustain itself, which was an attraction for investors buying into the stock.

"We wouldn't be buying into perceived value unless management can generate a new niche segment, like is did a decade ago," Mr Esho said.

"Unfortunately, things are likely to get worse for Metcash before they get better."

The company payed a fully franked dividend of 11.5 cents a share, in line with last year's figure.